Not every relationship can stand the test of time. This fact is just as true of business partnerships as it is for personal relationships. People and needs change, and sometimes it’s necessary to end one relationship to allow all parties to move on to bigger and better things. The problem is that when contracts and legally binding obligations are in place, ending things can quickly involve hard feelings and litigation.
Whether a partnership is commercial or personal, it’s possible to end things positively, with no litigation necessary. It just takes care and attention to detail. One of the smoothest ways to end business partnerships without going to court is through mediation. Working with a mediator can help partners achieve a neutral or even amicable business “divorce.” Let’s explore the difficulties of dissolving a business partnership and what makes mediation such an effective solution.
Considerations and Requirements for Ending Business Partnerships
In California, a business partnership is defined as a company structure in which two or more individuals operate a company as co-owners. Partnerships may be general, where all partners share equal rights and responsibilities, or limited, wherein some partners serve as investors only. Both arrangements have benefits over other structures, including the ability to choose how profits are distributed and some protection from liability.
Despite these benefits, partnerships end every day. Common reasons for ending a business partnership include:
- The death or retirement of a partner
- Lack of profitability
- The goal of the company was achieved
- It is impracticable for the partnership to remain in operation per the original agreement
- The partners wish to convert the company to another structure
Regardless of why you’re considering the end of a partnership, there are several questions you should answer before you proceed, including:
- Does the partnership need to be dissolved, or can one partner withdraw? If there are more than two partners and only one person wants to end the endeavor, they may be able to withdraw while permitting the others to maintain the business.
- Is there a dissolution agreement in place? If so, following the agreement’s terms for dissolving the business will be necessary unless all partners agree otherwise.
- Has the partnership met the criteria to wind up the business? If there’s no dissolution agreement, the partners must confirm that they have met the requirements of the California Uniform Partnership Act before proceeding with the dissolution.
- How will the assets and liabilities of the company be divided? Finally, and most importantly, the partners must decide how to divide the company’s assets and liabilities equitably. Dissolution agreements often set these terms, but if there is no such agreement or the partners want to seek a different division, they will need to negotiate the division among themselves.
The last point is often the most difficult. That’s also where mediation may be beneficial.
Benefits of Mediating Partnership Dissolutions
Business partnerships can be excellent arrangements when everything goes smoothly, but dissolution may challenge that. Since each partner is treated as a co-owner with equal rights to the business, it’s necessary to divide the assets and liabilities equitably. That’s where tensions can rise. Even otherwise amicable partners may require outside assistance to avoid commercial litigation if they disagree about handling the division.
Mediation can help head off disputes before they occur. In mediation, a neutral third-party mediator presides over negotiations, allowing the participants to communicate and avoid common pitfalls that could lead to litigation. The most valuable benefits of mediation include:
- Encouraging collaboration: Partners likely already have experience working together on important projects. The mediator can help them continue collaborating rather than argue over how to wind up the company.
- Providing an unbiased perspective: Like any other relationship, a partnership can be very personal. Even the most professional people can lose sight of the bigger financial picture if they feel hurt, offended, or betrayed by another partner’s actions. A mediator can provide an unbiased outside perspective to keep negotiations focused on what matters.
- Protecting against publicity: Commercial litigation is a matter of public record, but mediation is confidential. By mediating the dissolution of a partnership, the participants can keep disputes out of the public eye, protecting their reputations and future opportunities.
- Maintaining positive relationships: Litigation is an excellent way to poison business relationships permanently. If owners want to end a specific partnership while still leaving the door open for future collaborations, mediation is the better approach.
How to Prepare for Mediating a Business Partnership Dissolution
The goal of mediation is to collaborate, not to “win” the dispute. A little preparation can go a long way to make this collaboration more effective.
First, take the time to understand your reasons and goals for dissolving the enterprise. If your partner is retiring, your goals likely look very different than if your business is no longer profitable. Setting your priorities for mediation based on these goals can help you avoid unnecessary arguments and keep your negotiations from getting bogged down.
Next, collect information about the current state of the partnership. You’ll need a comprehensive financial report covering liquid assets, equipment, debts, liabilities, expected income, and anything else that might be of value. You’ll need to decide how this property will be split before winding up the business.
Finally, choose a skilled commercial mediator to oversee the process. The right mediator should have experience in California business law so they can provide useful insight into the process and its requirements. If you’re preparing to mediate the dissolution of your California business partnership, you should reach out to the Law Offices of Denise Eaton May, P.C. Our skilled mediators have decades of experience in all aspects of commercial law. We can help you wind up your partnership efficiently and amicably without the publicity, stress, or cost of litigation. Schedule your appointment with our Bay Area mediation firm today to learn more about how we can assist you.